Despite forecasts that demand for gold from jewellers and central banks will recover in 2021, traders weren’t listening on Wednesday in the wake of the Fed’s new inflation forecasts and the price of the metal fell out of bed, down more than $US40 an ounce in a matter of minutes.
Comex gold was around $US1,811 an ounce at 8am Sydney time – down 2.7% on the day or $US50 and seemingly heading lower.
That’s a slump that will trigger a sell-off in gold stocks on the ASX on Thursday and also sets up months of volatility – most of it bad for the sector – as markets adjust to the new inflation outlook from the Fed and a stronger US dollar and bond yields.
Helping gold lower was a rise in bond rates. The yield on 10 year US Treasury bonds rose to 1.58%, up 10 basis points on the day – but that is still a long way from the most recent peak of 1.77% on March 31.
But it was enough to kick gold lower, helped by a sharp rise in the value of the US dollar that saw the Aussie slump to around 76.15 US cents just after 8am Thursday from just over 77 cents before the Fed announcement at 4am Sydney time.
The Fed revealed it now expected its first post-pandemic interest rate hike to come in 2023, citing an improved health situation amid the vaccine rollout.
Projections showed a majority of Fed officials (in the so-called dot plot) anticipating at least two quarter-point rate increases in 2023, although the Fed said it would keep policy supportive for now to boost employment and chair Jay Powell said the plot should be “taken with a grain of salt”.
The Fed also reiterated its promise to await “substantial further progress” before beginning to shift to policies tuned to a fully open economy. It also held its benchmark short-term interest rate near zero and said it will continue to buy $US120 billion in bonds each month to fuel the economic recovery.
On inflation, the Fed sees it now running to 3.4% this year, above its previous estimate of 2.4%. The central bank also slightly lifted its inflation estimates for 2022 and 2023. The Fed though still described the current surge as being “transitory” and the forecast supports that stance with the fall away forecast next year.
Core inflation is now estimated to run at 3% this year against the previous forecast of 2.2%, which was projected back in March.
Powell still maintained that inflation is transitory. “The problem right now is that the demand is very strong, and incomes are high,” Powell told a media conference on Wednesday. “If you look behind the headline numbers, you’ll see that the incoming data are consistent with the view that prices that are driving that higher inflation is from categories that are being directly affected by the recovery from the pandemic and the reopening of the economy.”
But for gold that is going to be cold comfort and even that other support – tapering by the Fed of its $US120 billion a year in bond purchases – will see the Fed communicating its message.
He said tapering would be discussed at future meeting and that the Fed will provide advance notice before any concrete announcement is made. “The near-term thing is really about the path of asset purchases. We had a discussion about that today and expect to think about our progress at future meetings,” he said.
Future tapering will be “orderly, methodical, and transparent,” he said. “We see real value in communicating well in advance.”
The Fed forecasts and market reaction made redundant the annual outlook report from Metal Focus for gold which was issued on Wednesday.
It forecast that jewellery demand will rise but buying of bullion by exchange traded funds (ETFs) will fall sharply. Supply of gold from mines, meanwhile, will rise to its highest on record this year (after a fall in 2020 due to Covid).
It predicted that gold would average $US1,820 an ounce in 2021, up from $US1,770 last year.
Metals Focus said supporting prices this year will be the threat of inflation eroding the value of assets and currencies.
But judging by the slide on Wednesday, any benefits from that hedge might be a while appearing in the gold market.
